Austerity begins at home

A substantial reduction of the current expenditure requires cuts in the size of the government

By Hussain H Zaidi

The federal government has recently approved several austerity measures with a view to containing public expenditure, especially on the non-developmental side. Given the country's economic situation, the decision is a step in the right direction. However, its enforcement will be a real challenge for the government.

Governments generally resort to austerity measures when fiscal deficit becomes substantial. Such measures entail cuts in developmental or current expenditure or both. Under which heads public spending is reduced is determined by both political and economic considerations. In case of a developing economy, there is a dire need to speed up economic growth. Hence, a substantial reduction of developmental on expenditure is not desirable. If any curbs are to be made on the government purse, the same have to be either on subsidies or on current spending.

However, political considerations may dictate otherwise. A substantial reduction of the current expenditure may require cuts in the size of the government, which politically may be a difficult proposition. Moreover, certain vested interest -- such as armed forces in Pakistan -- may be politically too powerful to allow their share of the pie go down. Cuts in subsidies may push up inflation, which may dent the popularity of the government, in addition to having adverse economic effects. This makes cuts in developmental expenditure an easier option.

Coming to Pakistan, stabilising macro-economic indicators has remained a priority of the present government. At the top of these indicators is the fiscal balance. In 2007-08, the country's fiscal deficit jumped to Rs 777.2 billion, which constituted 7.6 percent of GDP. Under the International Monetary Fund (IMF) sponsored macro-economic stabilisation programme, the government set out to reduce the fiscal deficit in the range of 4-4.5 percent.

In 2008-09, fiscal deficit target was set at Rs 562.2 billion. However, the actual fiscal deficit at the close of the year was Rs 680.4 billion, which constituted 5.2 percent of the GDP. The reduction in fiscal deficit was commendable. However, this 'feat' was accomplished not by improving revenue-GDP ratio, which in fact went down in FY09 to 14.1 percent from 14.6 percent in the preceding fiscal year, but by sharp reduction of the developmental expenditure. Against the budgetary allocation of Rs 516.6 billion in FY09, the actual developmental expenditure for that year was Rs 455.7 billion.

For the current fiscal year, i.e., FY10, the fiscal deficit target is Rs 722.1 billion, which is based on projected revenue of Rs 2.15 trillion and estimated expenditure of Rs 2.87 trillion, including developmental spending of Rs 733.6 billion. The revenue target for FY10 is 15.59 percent higher than the actual receipts of Rs 1.86 trillion in FY09. Given the current economic situation and the increased cost of doing business caused by the precarious security situation, the revenue target may be difficult to achieve. In such a situation, drastic reduction of public spending will be the only way to achieve the fiscal balance target.

While the government was making efforts to slash fiscal deficit, the size of the cabinet was increased and seven new ministries were added to the number. The purpose was to reward the government's political allies as well as members of the ruling party. The increase in the size of the cabinet and the creation of new ministries was a mockery of the government's claims of enforcing fiscal discipline.

Coming back to the recently announced austerity measures, these include 40 percent decrease in foreign visits by the president and the prime minister and 25 percent cut in utilities expenses of their official residences, reduction of the number of federal ministries to 30 from 42 and divisions to 37 from 52. Public sector entities, such as Water and Power Development Authority (Wapda), Pakistan Electric Power Company (Pepco), Railways, Pakistan International Airlines (PIA) and Pakistan Steel Mills, whom collectively the government is providing an annual subsidy of Rs 252 billion -- 37 percent of the fiscal deficit -- will be restructured and privatised. Already, Ministries of Investment and Planning Commission have been abolished as separate ministries and made part of the Prime Minister's Secretariat. The Ministries of Law and Justice and Parliamentary Affairs have been merged.

A few words about the proposed reduction of the number of federal ministries and divisions seem in order. In case the Concurrent List of the constitution, as promised by the PPP government, is scrapped, a number of federal government organisations will not be required as their subjects will fall exclusively in the sphere of provinces.

The abolition of the Concurrent List, which requires an amendment to the constitution, is one of many things easier said than done. Probably, it will be easier for the government to reduce the number of ministries/divisions by merging them. Here are some suggestions.

The Ministry of Special Initiatives and Ministry of Livestock can conveniently be brought back to the Ministry of Industries and Production and Ministry of Food and Agriculture respectively. Ministries of Sports, Culture and Tourism can be merged; in the past these constituted a single ministry. There should be a single ministry comprising what are now the three ministries of religious affairs, zakat and ushr and minorities. The postal services ministry should return to the Ministry of Communications.

The decision to carve out a new ministry ought to be based on a cost and benefit analysis. There is a misconception that just by creating a new ministry a subject can be given proper attention. Already, every ministry has several wings, which can perform the same function as a full ministry without constituting a burden on the public expenditure.

There is a case for creating a new ministry only when its subject is too vast or too specialised to be handled by the existing ministry. In fact, in case of the present government, most of the new ministries were carved out not for reasons of efficiency or better results but as an instrument of rewarding political associates. All over the world the general practice is that ministers are appointed in charge of existing ministries. But in our case, a ministry is created only to accommodate a minister-in-waiting.

The reduction in the number of ministries should be accompanied by reduction in the number of ministers. Presently, several ministries have both federal ministers and ministers of state (MoS). For reasons of austerity, if for nothing else, the number of MoS should be reduced to the bare minimum. As a rule, an MoS should be appointed in a ministry where either the minister in charge is the prime minister himself or where a minister has been given the charge of two or more ministries.